Table of Contents
Controlling Company Knowledge Productivity Index through
The 4-Dimensional C ost of Management Model:
System Dynamics A pproach
By
Omar E]-Badry
Sales and Procurement Manager, EMEC
omarelbadry@ hotmail.com
Mohamed Kholief
Web and Software Development Manager, GoodNews4ME
2 Abdel Kader Hamza St.,
Garden City, Cairo, Egypt
mkholief2000@ yahoo.com
Yasser Abouelenein
Network Access Transmission Manager, V odafone Egypt
Dallah Tower 7 A Comiche El Nil, Maadi, Cairo
yasser.abouelenein@ vodafone.com.eq
Khaled Wahba
Assistant Professor, Systems and Biomedical Engineering Department
Faculty of Engineering, Cairo University
Tel: +2 02 737 6006, Fax: +2 02 739 1380
Khaled.wahba@ riti.org
ABSTRACT
Knowledge has become the vital source of company’s competitive advantage. It also has become
accepted that knowledge represents an intangible as well as significant comerstone of a company’s
market value and hence an asset to be measured and managed, just like others tangible assets are
measured and managed. So, no wonder that knowledge-workers have now replaced capital and labor
as the scarce resource limiting growth. As a result, there is already an expanding literature on the
subject - much of it theoretical, but all regarding the identification and management of a company’s
knowledge assets as crucial for commercial success. This paper is about how organizations can better
manage their knowledge, viewed from a practical standpoint with the emphasis on the impact of
investing in knowledge on a company’s productivity.
Investment on knowledge management in this study has been subdivided into 4 main categories
(dimensions), namely; investing on Training, allocating budget for Total Quality Management,
Investing on Intemal Organization Learning, and finally, Hiring New Skilled and Experienced
employees. So, all costs associated to the above mentioned dimensions are considered the cost of
management, that will be used to evaluate the company’s productivity index using the system
dynamic approach in order to quantitatively getting the sense of the subject.
The proposed model is an initial attempt to build a viable predictive model for application of
Knowledge Management in businesses. The model should assist managers to increases
competitiveness of the company by applying knowledge management practices.
KEYWORDS
Knowledge Management, Cost of Management, Tacit Knowledge, Explicit Knowledge, Company
Shared Knowledge, Knowledge Productivity Index.
INTRODUCTION
Peter Drucker in his article (Drucker, 2000) pointed out that although the production equipment was
the most valuable asset for the company in the 20" century, knowledge workers and their
productivity will be the most valuable asset of the company in the 21° century. The history
witnessed throughout different episodes the efforts and trials in defining productivity with the
objective to improve it. The researches also have witnessed the change in the attention of the
researchers from emphasizing on the manual-worker productivity to the knowledge-worker
productivity.
Different approaches and methodologies have been adopted and applied to making manual workers
more productive. Manual workers were lucky to have the more-than-hundreds- year of attention from
researchers. However, few researches have just started to tackle the Knowledge- worker productivity.
The companies in the developed countries - after Drucker - have to emphasis on the knowledge-
worker productivity, as it is their first survival requirement, if they want to maintain themselves,
their leadership and their standard of living. For Drucker emerging and developing countries still
have to finalize their role and job to improve the manual-workers productivity before they start to
enter the era of knowledge- worker productivity, which can take from 30-40 years. In other words, he
wanted to point out that those countries still are behind the developed countries with the distance of
that period of time. By that time the developed countries can expect to have significant advantage,
both in quality and quantity, which ensures their leadership.
PROBLEM DEFINITION AND OBJECTIVE
All countries whatever their economic status can have the same and all chances to leverage their
productivity whichever the methodologies and principles they adopt or/and adapt, as long as they
have the least potential to build and develop knowledge-workers without ignoring the still-to-
improve of the manual-workers productivity.
Making knowledge-workers more productive requires changes in basic attitudes not only from the
side of the individual knowledge-worker, but also from the side of the whole organization. Changing
attitudes is not the only requirement, but also the continuous innovation as well as continuous
learning and teaching have to build into the job, all within the framework of what is so-called
“Knowledge Management” .
So, companies should not look at the associated costs as components that should be added to
expenses of the companies. On contrary, building and development of knowledge-workers have to
been seen like investment in the company assets.
So, the objective of this paper is to study the impact of such investment on the requirements
(enablers) for productivity of the whole company. In other words, it is the aim of this paper is to
evaluate the retum on investment on knowledge management elements, by measuring the company
knowledge productivity index. Doing so, different methodologies can be used, however one of the
objectives of this paper is also to make use of the advantage of the system dynamic approach as a
tool to highlight the importance of such investment and to show its return.
STATE-OF-THE-ART
The current researches in Knowledge Management can be classified into three main categories
according to their purpose:
Researches seeking to explore the importance of Knowledge Management on the company
performance:
Within this category, researchers divided Knowledge into Explicit Knowledge and Tacit Knowledge
of individuals. They discussed how Individual Knowledge build-up through the three leaming
channels: training, studying, and experience. While companies are growing, individual experience is
built-up automatically, and by retum enhances the company overall Knowledge. On the other hand,
training and teaching are initiated by management to improve the leaming process; however, their
effect is heavily depending on individual's intelligence, motivation, and their willingness to lear.
According to Koenig/Membrillo, companies’ Intellectual Capital increases by the Explicit
Knowledge and the fraction of Tacit Knowledge convertible to Explicit. However, we believe that
core competences are those competitive advantages embedded in companies’ performance and
cannot even be recognized by employees.
While researches made good achievements to identify leaming process, and how Individual
Knowledge may affect companies Applicable Knowledge, they lack to assess the financial impact of
knowledge. In today world, it is impossible to convince management to make any move without
quantifying its cost and benefits. Even management recognized Knowledge importance; they need
tangible indicators to assess worthiness of budget spent to improve it. Consequently, Knowledge
Management expenditures are always the first victim of cost cutting programs. ABB, one of the
giants in the electrical industry, was applying a networking program, the so-called “International
Training Program”, aiming to manage Knowledge through its 140 countries of activities. The
program was seeking to gather employees with average experience of 3-5 years in ABB aging less
than thirty, whom we could expect to be the future middle management. At ABB campus in Sweden,
participants from 19 countries attended management lectures and workshops in order to create same
culture across countries and to assure that all ABB employees speak the same language, which
eliminate barriers between line managers and enable them to share Knowledge more efficiently.
During such meetings, lasting for three months, employees shared their experience, and when
returning back to home countries, all participants remain in contacts and support each others solving
work problems. As soon as financial indicators decayed and cost cutting programs started, the
ambitious program was hold. If top management could evaluate clearly the financial effect of such
program, may be they would change their decision.
Researches addressing the different ways to manage Knowledge:
This category is considering mainly different ways of managing Knowledge especially within wide
spread multinational organizations. The objective is to find efficient tools to convert Explicit & Tacit
Individual Knowledge to company Knowledge Capital. One of the comprehensive models in this
field is the ‘T-Shaped Managers” model by Morten T. Hansen and Bolko von Oetinger. They stated
as follows:
“You might ask, Why rely so heavily on managers to share knowledge? Why not just institute a
state-of-the-art knowledge management system? The trouble is that, while those systems are
good at transferring explicit knowledge-for example, the template needed to perform a
complicated but routine task - direct personal contact is typically needed to effectively transfer
implicit knowledge - the kind that must be creatively applied to particular business problems
or opportunities and is crucial to the success of innovation driven companies.”
According to their findings, managers must act in two areas; Horizontal part of “T” with the
objective to share knowledge with different Business Units through peer groups, transferring
expertise, sharing critical decisions, etc. as well as Vertical part of “T” with the objective to secure
their own Business Units performance and results.
Top management award managers for both roles not only for their vertical roles as it used to. The
model touches the financial impact of Knowledge Management as increasing revenues and saving
expenses, however, the model still not reliable enough and cannot be treated as generic model from
financial point of view.
Researches trying to find the financial value and indicators of Knowledge:
Articles in this category are scarce, but one of the practical and comprehensive researches is by Paul
A. Strassmann, 1996. In his research, Strassmann tried to measure the financial Cost & Effect of
managing Knowledge, as well as the market value of companies’ Knowledge Capital. He based his
findings on the famous physical law and system view “There is no Output without Input”. The
theory can be summarized as follow:
Using traditional financial tools, ie. Capital Asset Pricing Model, one can identify the required
retum at a certain risk level and business environment. After calculating companies’ net income, we
may deduct the expected retum on equity, ie. net income - (k,*equity). By doing so, we eliminated
all return on financial input such as interest, taxes, preferred stock, and owner equity. What does the
surplus reflect? It simply reflects the Management Value Added. The Management Value Added is
the obvious reflection of the Management Knowledge. What is the input to get the measured return?
Simply it is all costs not related directly to the delivered goods/services, or what he called Cost of
Management, such costs are traditionally recognized as overhead.
“Management Value Added is what is left over after obviously all costs are fully accounted for. This
calls for subtracting from the Profit after Tax an allowance for the costs of shareholders’ equity as
well as other adjustments to correct for accounting peculiarities largely influenced by the tax code.”
mentioned Strassmamn. “Rigorous cost analysis is necessary to isolate all expenses that cannot be
directly attributed to the delivery of goods or services to customers and then designate them as the
Costs of Management” , pointed out Strassmann in his article.
By dividing the Management Value Added by Costs of Management, we get a new indicator Return-
On-Management (R-O-M). The R-O-M is the financial indicator of Knowledge. As a good
approximation, he used the Sales, General & Administrative expenses item mentioned in the
published financial statements. He used this indicator to create a company ranking called
Information Productivity™ (strassmann, 1996).
He went further to assure that investors recognized the value of the management Knowledge, which
is the difference between the market share price and its book value. However, we are not convinced
by his method to evaluate Knowledge Capital, as we believe that he would use the difference
between the market value of shares and their book value instead of just dividing the Management
Value Added by the weighted Average Cost of Capital as an approximation of the cost of Knowledge
Capital, since there is no evidence to illustrate such approximation. The change in that difference
determines the market price of the Knowledge Capital.
In addition, we would base our comparison using Industry Average Knowledge Productivity in order
to take into consideration external factors, which may affect the Management Value Added and the
related Costs of Management, i.e. PEST factors.
SYSTEM DYNAMICS APPROACH
Believing in the advantage of the system dynamics approach in different fields, the researchers have
suggested using it to show the financial impact (retum) of Knowledge Management on company
productivity. A simulation model has been built with the emphasis on the 4-dimenasional expenses
(investments) model; Leaming, Quality, Networking as well as hiring (adding) new experiences to
the already existing pool.
Figure 1, shows the interrelated elements of the proposed model.
@ ap ail) (iv)
Learning-By-Training
Knowledge Flow .
4
Individual Knowledge H Knowledge , Knowledge
Knowledge Transfer H Accumulation | Evaluation
5
ra
Leaming-By-Experience | | Tacit & Explicit H '
H Knowledge Flow H '
' H i
H Company Culture: H v 1
H H '
H * Team-working H ' Company KPI
H * Economic ‘le — ' Vs
' Transparency H ompany V4 H
i + Networking Industry KPI
H * Intelligence H A 1
|
Tacit & Explicit i
H i
H
Figure 1: Block Diagram for Knowledge Management Proposed Model
PROBLEM ARTICULATION
Here are the key variables of the proposed model to be defined and explained as follows:
(Note that some of the below definition have been supported by the cassell consice dictionary, 1997)
Key Variables:
Networking: A group of people who are useful to each other because of the similarity of their aims,
background etc.
Team-working: A group of people who work together for the same purpose.
Economic Transparency: The quality of being clear and transparent in presenting economic data.
(http://www. hyperdictionary.com/dictionary? define=transparency)
Individual Tacit Knowledge: An important cognitive dimension embedded in individual
experience and involves intangible factors such as personal belief, perspective and the mental
models (Nonaka, 1991).
Individual Tacit Knowledge Conversion Rate: The change from one state to another of the
individual familiarity or understanding gained by experience or study or from instruction implied but
not actually expressed.
Average Individual Intelligence: The mean rate or value of the acquired knowledge, which is a
characteristic of a particular person (intelligence: quickness or sharpness of intellect).
Individual Explicit Knowledge: Knowledge, which can be articulated in formal language including
mathematical expressions and manuals (Koenig, 1998).
Individual Explicit Knowledge Conversion Rate: The change from one state to another of the
individual familiarity or understanding gained by experience or study or from instruction implied
and is serving to explain or interpret.
TQM effort/commitment: Total Quality Management, in industry, a systematic commitment to
quality of product and customer service while increasing efficiency and reducing costs.
Knowledge Productivity Gap: Difference between Average Industry Productivity Index and
Company Knowledge Productivity Index.
Knowledge Productivity Index: A numerical scale indicating variations in the efficiency in the
production desired by the company by reference to a given base level; Management Value Added
divided by Cost of Management (Strassmann, 1996).
Company Shared Knowledge: The part to which one has a right or which one is obliged to
contribute, a fair or just portion of the familiarity or understanding gained by experience or study or
from instruction, for the whole company.
Skilled Employees Turnover: The rate at which the experienced, highly trained employees leave
and have to be replaced.
Job Satisfaction: Job satisfaction is a summary evaluation that people make of their work. People’s
levels of job satisfaction are the result of their job tasks, the characteristics of the organization in
which they work, and individual differences in needs and values (Hodson and Sullivan 1995).
Experience: The knowledge gained by observation or trial.
New Comer Experience: The required threshold experience of new comers.
Training: The preparation of a person for a particular activity, occupation.
Best Practices: It is a state that every one in the company knows what do in a specific situation and
what not to do.
Applicable Knowledge: The familiarity or understanding gained by experience or study or from
instruction, which is capable of being applied.
Epiphanies of Scale: Creative insights that a hot startup company that has a fewer intellectual
resources may not be able to achieve (Hansen and Von Oetinger, 2001).
Entry Barrier: Immaterial obstruction to become a competitor in an industry
Decision Quality: The degree of excellence, relative goodness of the determination of a trial, contest
or question.
Cost of Shareholder’s Equity: Obtained by multiplying the Shareholder Equity shown on the
Balance Sheet by the costs of Shareholder Capital
Management Value Added: The difference between the final value of goods/services and the cost
of manufacturing and marketing it resulting from the act of managing; what is left over after
absolutely all costs are fully accounted for (Strassmann, 1996).
Cost of Management: The price charged or paid for the act of managing; all expenses that cannot
be directly attributed to the delivery of goods/services.
Desired Knowledge Productivity Index: The average of the efficiency in the production of the
familiarity or understanding gained by experience or study or from instruction in a field of activity
organized for economic gain.
Obsoleteness: The property of being out of date and not current.
(http: //www.hyperdictionary.com/dictionary/obsoleteness)
This set of variables provides a reasonable starting point, for conceptualization of the feedback
structure; governing the dynamics of the “Controlling Company Knowledge Productivity Index
through the 4- Dimensional Cost of Management Model.
CAUSAL LOOP MAPPING
Next we are going to use the description of the systems and reference modes to develop the causal
loop of the feedback processes we believe are responsible for the dynamics of the model we are
discussing. The overall Causal Loop Diagram is shown in figure 2 (see appendix A).
DIMENSION 1 -- THE “INTERNAL EXPERIENCE Loop”: BALANCING LooP
The “Transparency”, “Teamworking” and “Networking” are assumed to be exogenous variables:
once any combinations (or only one variable) of these variables increase, based on the management
decision, the “ Individual Tacit Knowledge Conversion Rate” will increase. By new hiring (based on
certain criteria), this will in turn increase the “Experience” , hence the “ Individual Tacit Knowledge
Conversion Rate” will also increase see figure 1. Doing so, the “Company Overall Shared
Knowledge” increases, hence the individual “Experience” will increase. This basically will motivate
the employees and will make them satisfied with their job “Job Sat”, which eventually will decrease
the “Skilled Employees Turnover” . Consequentially, the decision to hiring new skilled employees
will not be taken frequently, that might stop the flow of new blood. So, here the company should
decide to build and develop new experiences internally through the other dimensions (see the other
loops below), rather than acquiring it externally.
Skilled Employes:
‘Tumover
. Osoleteness Rate
New Comet + Job Satisfaction
Experience
in ep Economic ‘i
ee Ce oe
Experience *
‘Teamworking # Company Shared i Best Pacts Applicable
¥ + +. Knowledge 7)
Individual TK CR. was
. +
Individual TK Decision Quality
Avg. Individual
Intelligence Direct o _) of 5
al ZY ay,
“> Individual XK CR
+ Enty ad
“ ened”
Cost of
Quality a Shareholders’ Equity 4
Management Industry Average
Value Added Productivity Index
+
Co. Knowledge
Productivity Index
Cost a ee
Knowledge
Productivity Gap a
Figure 2: Causal Loop Diagram
THE “TRAINING BUDGET Loop”: BALANCING LOOP
If the company management decided to capitalize on its existing human resource by investing in the
training, so the “Training Budget” will increase and hence giving the chance to have more effective
“Training” that hence increases the “Company Overall Shared Knowledge” , and then the individual
“Experience” .
DIMENSION 2 -- THE “LEARNING LOOP”: BALANCING Loop
Based on the performance of the company in the industry, the “Desired Knowledge Productivity
Index”, exogenous variable, can be increased in case of high competition in the market. Once this
variable will increase, this will lead to an increase in the “Knowledge Productivity Gap” . This in
turn increases the chance of management decision either to increase “Training Budget” to leverage
“Individual Knowledge (both the explicit and the tacit)” as well as the “Company Knowledge
Productivity Index” through increasing the effective “Training” and the “Company Overall Shared
Knowledge” with the objective to cope with the “Desired Knowledge Productivity Index”, or to
encourage the “Total Quality Management Expenditure” a mean to increase the “ Individual Explicit
Knowledge” which contributes in building the Quality Loop, see below.
DIMENSION 3 -- THE “QUALITY Loop”: BALANCING Loop
As mentioned above one of the alternative decisions that the management can make as a result of
increased “Desired Knowledge Productivity Index”, is to increase the expenditure on the “Total
Quality Management” as a way to ensure increasing the “ Individual Explicit Knowledge” , which in
tum leverage the “Company Overall Shared Knowledge”, hence the “Company Knowledge
Productivity Index”. Consequently the “Knowledge Productivity Gap” will decrease, which
constitutes the balancing loop that limits the investing in the “Total Quality Management” .
DIMENSION 4 is represented by controlling (managing) the overall experiences inside the company
acquired through the Leaming, the Networking, the Quality Dimensions and through hiring new
skilled employees (with certain experiences/intelligence level).
It is important to notice that “Experience” has three effects: first, when employees acquire
experience over time, they will need less “Training”, they may as well conduct training courses or
on-job training for new incomers, which will decrease the “Training Budget”. Secondly, having such
employees, the company “Tacit Knowledge” will increase allowing other mechanisms - “Team-
working”, “Networking”, & “Transparency” - to enhance the “Individual T.K. Conversion Rate”.
Finally, the only negative effect of “Experience” is that experienced employees will definitely have
higher salaries and they will have retirement compensation, which will increase “Cost of
Management”. This last effect is compensated by the first two effects only if the company is
applying knowledge management program. On the other hand, if knowledge management is ignored,
our model proves that the company is paying for a certain asset without being deployed.
SIMULATION MODEL FORMULATION
A stock and flow model has been developed (Figure 3) from the Causal Loop Diagram with
additional scaling variables to adjust the scaling of the resultant graph. Moreover, to facilitate
reading the stock and flow model table 1 indicates the mapping of causal loop diagram variables into
the abbreviated variables in the simulation model and table 2 explains the auxiliary variables
functionality.
Table 1; Mapping the Variables in the Causal Loop Diagram into the Variables in the Stock-
Flow Model
Abbreviation Full Name
New Comer Exp New Comer Experience
Ind TK CR Individual Tacit Knowledge C onversion Rate
Ind TK Individual Tacit Knowledge
Ind XK CR Individual Explicit Knowledge C onversion Rate
Ind XK Individual Explicit Knowledge
Job Sat Job Satisfaction
Delay CSK to Exp Delay due to converting Company Shared Knowledge to
Experience
CSK to BP delay Delay due to converting Company Shared Knowledge to
Best Practices
Convert to BP Converting Company Shared Knowledge to Best Practices
BP Stream Best Practices Stream
Desired KPI Leverage | Delay due to request to leverage the Desired Knowledge
Delay Productivity Index (KPI)
Inflow of Leverage Req Request to Leverage KPI
Leveraging Desired KPI Leveraging Desired Knowledge Productivity Index (KPI)
10
Desired KPI Desired Knowledge Productivity Index (KPI)
MVA Management Value Added
TQM Total Quality Management
Art Delay Artificial Delay to simulate delay in Reinvesting Decision
Table 2: Auxiliary Variables added to the stock and flow to facilitate simulation
Variable Description
Magmt Factor The intervention by Management to enforce Best
Practices
Aux Auxiliary Variable function is to help in setting the
obsoleteness rate value
TBManagement Training Budget Management controls to what limit
should the company increase or decrease the training
budget
Competitor Pressure It is the pressure exerted by competitors to take the
brilliant skills from the company in order to gain more
ready to apply knowledge and also to weaken their
competitor.
Management Intervention Management Intervention is making the reverse action
to the competitor pressure. It tries to increase the job
satisfaction through incentives, policies,... etc
Time Constant Necessary for the Art Delay
Management Strategic Decision | Strategic Decision here is to increase or decrease the
Desired Knowledge Productivity Index
Magnitude o Profit Effect It depends on the company culture. It determines upon
profitability whether to increase Desired KPI or to keep
it low.
Decision Quality Sign It is considered Sign on both profitability of the
company and its performance against the Desired KPI.
If it is performing well, the probability will increase to
affect the decision quality positively and accordingly the
revenues will increase and expenses will decrease. On
contrary, If the company is not performing well, the
probability that the Decision Quality will be affected
negatively is higher.
The following assumptions must be taken into consideration:
¢ Individual Tacit Knowledge CR is assumed to have SShaped curve and on the other hand
the Individual Explicit Knowledge CR takes the form of a goal seeking curve. The
assumption is based on the hypothesis that acquiring Tacit Knowledge (TK) is more difficult
than acquiring Explicit Knowledge (XK).
¢ It is assumed that the contribution of both TK and XK is different in weights when affecting
the Company Shard Knowledge.
¢ Experience adds more to TK than XK
¢ Training adds more to XK than TK
11
Company Shared Knowledge is converted to Applicable Knowledge through Best Practices
identification
Applicable Knowledge affects Sales Revenues more than the Decision Quality
Decision Quality affects Expenses more than the A pplicable Knowledge
12
Skilled Employe over Competitors Pressure
New Gomer Exp Delay CSK to Exp
m)
Economic Tfansparency
Management Interevention
rofit
Training Budget
Training Decision Q ually Obsoleteness
ind XK
Avg Individual Intelligence CSK to BP delay
--0—8
Reinvesting
= oF
sca Convert To BP
BP stream
Mgmt Factor Epiphanies of Scale Profit
BP stream Q Best Practices le Knowledge & S
Decision Quatity histoyi€al Expenses Entyy Barrier
Profit
o: ®' bo Knowledge Productivity Gap,
rer )
Direct gost and Othet Costs Control
=)
Direct Cost and‘Other Cosfs
Besired KPI Leverage Delay
inflow ohLeverage Req!
Networking historical Revenues
Experiel C
st of Managem
TOM
Decision Quality Sign
Decision Quality Sign
bfManagement Control
faining Butiget
TBManagement
investing Magnituge of Profit Effect
@
Inflow invest
Managément Strategic Decision
Knowledge Productivi
Dividend Decision c )
Art Delay C) Desired KPI
Knowledge Productivity Gap
Figure 3: Stock and Flow Diagram
13
TESTING MODEL AND SCENARIO/POLICY ANALYSIS
Taking the assumptions mentioned and described above into considerations, the model has been
tested and we can conclude the following:
* For the Company Shared Knowledge in the normal situation we see that it is increasing as
long as the company taking the proper procedures. The Company Shred Knowledge is
affected by the inflow which controlled by Tacit Knowledge and Explicit Knowledge.
Another Factor is the outflow which is controlled by the Skills Tumover and Obsoleteness
Rate of Knowledge for the industry of concem. From (Figure 4) we see that the company
shared knowledge directly affects the profitability of the company.
JM company Shared Knowledge Inflow
3aF
wie
outflow
Profit
“
a
|
a
a
—
Graph (Untitled)
Years
Figure 4: Company Shared Knowledge, Inflow, outflow and Profit
14
® -company shared Knowledge Inflow outflow Profit
a ae Graph (Untitled) Years AM Mar
Figure 5: Company Shared Knowledge, Inflow, outflow and Profit
¢ From Figure 5 we can see that, by increasing the Obsoleteness Rate the Company Shared
Knowledge will decrease and also this will decrease the Profitability growth rate
¢ _Inspite of the increase in the Cost of Management as shown Figure 6 we can see that the
Profitability of the company still going up. This is due to the fact that any increase in Cost of
Management means more and more Knowledge which positively increases the company
15
competitiveness.
9 company Shared Knowledge Profit Cost of Management
Z| ee
a
———= =
8aF Graph (Untitled) Years AM Mar
Figure 6: Company Shared Knowledge, Profit and C ost of Management
Company Shared Knowledge Profit Cost of Management
Xv
IA
PAN
4< ————
aea4 Graph (Untitled) Years AM Mar
Figure 7: Company Shared Knowledge, Profit and C ost of Management
Cost of Management and Profitability are correlated. Although the cost of Management is
considered on the Expenses side. We can see in (Figure 7) that by decreasing cost of
management the profitability goes down and vice versa.
Now we will examine the effect of Cost of Management on Knowledge Productivity Index
which affects the company competitiveness. The figure below shows the initial situation
before changing Cost of Management.
Company Shared Knowledge Profit Cost of Management Knowledge Productivity Index
ra
—
va
eee |
YY
| ze
aeaF Graph (Untitled) Years AM Mar
Figure 8: Company Shared Knowledge, Profit, Cost of Management and KPI
By decreasing the Cost of Management as shown Figure 9, we notice that Profitability
instability became apparent and also we realize the fact The company Knowledge
Productivity Index is an indicator for the company profitability
17
9 company Shares Knowledge Profit Cost of Management Knowledge Productivity Index
| AN
aeF Graph (Untitled) Years AM Mar
Figure 9: Company Shared Knowledge, Profit, Cost of Management and KPI
¢ Finally we can make use of the above results by measuring KPI and Cost of Management and
monitor their values. Investing in Knowledge Management gives companies the necessary
tools to monitor its performance and to enhance it.
EXTENDING THE MODEL
To extend the above model we need to:
* Identify the industry and the company of interest
* Identify the Desired Knowledge Productivity Index (KPI) for that industry which represents
the average of KPT for the top companies in the intended industry.
* Based on the behavior of the company in acquiring their knowledge we can simulate the
current state and show the hidden dimensions to the company management that affect the
company shared knowledge and hence the applicable knowledge which will affect the
knowledge productivity index of the company
* For each industry there are many factors that can affect the job satisfaction of employees
that’s why the link from Company Shared Knowledge to Job Satisfaction and hence to
Employees Tumover is industry specific.
18
Annual U.S. Total Separations by Industry
0 615 6 MSO TOG
Total industry & Governnent Ss 33.50
Privat Inclustry iin 43.40,
Kin, a 39.50
Construction SN 62.60
Manvfactuin; I 33,20
hk os == 4
Non Durable Goods I 33.00
Transportation Public Utiities (Sy /N a280
Wholesale Tee I 30.90
Real ree A 59,0
FinancelinsuranceReal Estate “0 25.80
Sen ices I 20 30 © Nobscot Corporation
www nabscot com
Figure 10: Employee Turnover Rates - Total Separations by Industry (Oct/01 - Sep/02)
(source: http://www.nobscot.com/survey/us total separations 0902.cfm)
From figure 10 we can see that the tumover rates are different which must obligates us to
consider the industry of interest in our extension of the model.
* One of the critical points in this model is measuring the Cost of Capital. Strassmann (1999)
said “The tricky problem is determining the appropriate cost of capital to be used in
estimating the worth of knowledge value-added. This is where academics have spun
elaborate theories, including the most popular approach taught to MBA students as the
“capital asset pricing model”. We used shareholder's cost of capital because it is easy to get
from balance sheets. But in order to help companies calculate the Management value added it
is required to study the company processes very well case by case, the KVA methodology
(creation of Drs. Thomas J. Housel and Valery Kanevsky) can help in this process
CONCLUSION
Knowledge Management (KM) is a very broad term - it is not just about technology, but includes all
the human and organizational aspects of integrating knowledge. It is practiced by most companies,
whether they know it or not, but often as accidental practice. Efficient integration of this Knowledge
Management is the challenge for such companies.
Today, Knowledge is the most important product in organizations. They hiring minds, and not
hands, knowledge is the company assets. So, organizations are seeking to create systematic ways to
identify and convert individual expertise, skills and experiences into organization knowledge. A
company’s ability to use knowledge depends on how eager people are, about sharing it. Individual
knowledge is power, but will be much powerful when its be shared. Leverage knowledge is possible
only when people value building on each other’s ideas and sharing their own insights. Much of this
is shaped by the culture of the organizations.
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So, throughout the discussion in this paper, it has been pointed out that a company can leverage it
knowledge by different lines of investment on extemal as well as internal experiences. The later one has
been realized by hiring (if needed) new blood, which has certain level of experiences and intelligent. As
for the intemal experiences, the study has shown how company can build and develop it (1) through
deploying the total quality management programs and initiative, (2) through investing in people through
training and finally, (3) through injecting/building the culture of knowledge sharing. However, to
convince the decision makers to take the actions towards the above mentioned lines and the associated 4
dimensions, the researchers have proposed the system dynamic methodology to show quantitatively,
their impact on the productivity of the company through evaluating the cost of management and the
management value added.
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